Michael O'Leary (59 page)

On Thursday 5 October the telephone rang in the London home of John Sharman, the Aer Lingus chairman. At the other end of the line was David Bonderman, Ryanair chairman. It was a brief conversation, but a startling early-morning wake-up for Sharman. Ryanair, said Bonderman, had informed the stock exchange before trading commenced that morning that it had acquired a 16 per cent stake in Aer Lingus and that it was making a cash offer of €2.80 a share for the rest of the equity. Hurriedly, Sharman made contact with the rest of the Aer Lingus board and tried to contact Mannion, who had already departed. While Bonderman broke the news to Sharman, O'Leary was trying to contact Bertie Ahern to tell him. Ahern was unavailable, so O'Leary briefed his special
adviser and spoke to Martin Cullen, minister for transport, as well as Brian Cowen, minister for finance, and Michael McDowell, deputy prime minister.

The shock was almost tangible; it was, says one official adviser, the government's ‘worst nightmare' come true. O'Leary, the tooth and claw capitalist, was pouncing on the national airline. In the financial community, the shock was no less profound. O'Leary, the champion of low-cost, low-fare flying, was stepping outside his comfort zone and into the world of traditional national airlines, trade unions, high costs and transatlantic flights. He was in effect breaking the mould he had fashioned so successfully over the preceding thirteen years.

The supreme opportunist, O'Leary had struck when no one was expecting it. He had often toyed with the idea of buying Aer Lingus, but clearly this would never be a possibility unless the airline was privatized. His own scepticism about the flotation ensured that he had not spent too much time planning his raid. Two weeks before the shares were due to start trading he had discussed the possibility of a bid with Bonderman. Initially surprised, Bonderman had quickly warmed to the idea. Ryanair had cash reserves of more than €1 billion, so had no difficulty funding a bid. Kyran McLaughlin, a Ryanair non-executive director and senior director at Davy Stockbrokers, a Dublin firm, was also briefed on the plan, as he and his brokers would be charged with implementing it. On the Tuesday night before Aer Lingus shares were due to start trading Bonderman called a telephone board meeting of Ryanair's directors so that O'Leary could reveal the plan and seek the board's support. It was the first any of the other directors knew about it, but their initial shock soon turned to approval.

‘I had a couple of conversations with David Bonderman,' O'Leary said in an interview with the
Sunday Tribune
. ‘We first discussed the prospect of buying shares in the airline the Tuesday evening before it floated [on the unofficial market] on Wednesday. We first discussed the formal offer with the board only on Tuesday of this week. So it's happened that quickly. That's why nothing
leaked. Because we weren't discussing it for yonks. At Ryanair we don't sit around agonizing over things.'

O'Leary argued to his board that Ryanair could not lose by buying shares and mounting a takeover bid. The Irish government was selling at a discount, so the stake could be acquired relatively cheaply. At best, victory would mean that Ryanair would get control of an overstaffed and underperforming airline, with ample opportunity to strip out costs and make it more efficient and profitable. At worst, Ryanair would be left with a minority interest in an airline that would then have to perform if it were to escape its clutches. Either way, the value of Ryanair's investment should rise.

O'Leary knew that the government would react with alarmed hostility to his bid, and knew too that the trade unions in Aer Lingus would go ballistic. That, however, was a source of amusement rather than concern. The commercial logic of securing a strategic holding in Aer Lingus was what counted, not the damaged sensibilities of politicians and trade union officials. As a large shareholder in Aer Lingus, O'Leary's hand would also be considerably strengthened in his long-running dispute with the Dublin Airport Authority, since the two airlines accounted for 70 per cent of traffic at the airport. O'Leary remained determined to block the authority's plans for a lavish new terminal building – the estimated costs of which had continued to rise over the previous month – and remained committed to his goal of a low-cost alternative terminal operated by different management.

There was, he recognized, the potential for problems with the European Commission because of the combined power of Aer Lingus and Ryanair in the Irish market, but he believed that any objections on competition grounds were surmountable. If the commission were to block the deal, it would have to tread warily, finding a form of words that did not preclude future consolidation in the European airline industry. He had, too, a major precedent on his side: the merger of Air France and KLM had created a European giant that dominated airports in Paris and Amsterdam, yet it had been waved through by Europe's regulators.

Just as important for O'Leary was the frozen terror that his bid
would provoke at Aer Lingus. While its management devoted its energies to fighting off the takeover, he could concentrate on Ryanair's expansion from Dublin and new European bases, confident that a major rival was distracted. He was quick to note that the potential deal was relatively small-scale for Ryanair, and he referred to Aer Lingus as a tiny regional airline. Ryanair now dwarfed Aer Lingus, carrying almost six times as many passengers. If the airline continued to grow at 20 per cent a year, it would add the annual total number of Aer Lingus passengers in a single year's organic expansion, and O'Leary had not deviated from his ambition to double Ryanair's size over the next five years. Victory, if it came, would make him impregnable in Ireland, but would not significantly alter his European ambitions.

Some Ryanair shareholders were worried that the airline would be dragged down by dealing with the unions, that it would not be able to manage Aer Lingus's long-haul operations and that its ability to grow profits by expanding on its own terms – rather than by acquisition – would be hampered. O'Leary countered by saying that Aer Lingus would be run as a separate business, that the two airlines would continue to compete with each other, that fares would fall not rise from Dublin and that Ryanair's purchasing power and influence with jet manufacturers would ensure that Aer Lingus would be able to modernize its fleet at advantageous prices.

Ryanair's formal offer document for Aer Lingus was published on Monday 22 October, complete with cartoon cover depicting Ryanair and Aer Lingus as two small rugby players standing shoulder to shoulder against the snarling charge of three giants – Lufthansa, Air France and BA. It was a disingenuous image and in stark contrast to O'Leary's claims that Aer Lingus was but a small regional airline while Ryanair was a European colossus. The details of the offer, though, were more straightforward. Ryanair would pay €2.80 a share, a premium of 27 per cent over the flotation price. The document highlighted the volatility of Aer Lingus's profits – over the previous fourteen years its cumulative losses of €616 million had exceeded its cumulative profits of €433 million – and it committed Ryanair to keeping Aer Lingus as a ‘stand-alone
separate airline'. Seeking to preempt concerns about the creation of a single dominant airline at Dublin airport, the document noted that it ‘continues to be served by over 50 other scheduled airlines currently serving 112 international destinations'. It also claimed that the combined airlines would account for 61 per cent of aircraft movements at Dublin airport, well short of the 73 per cent dominance enjoyed by Olympic at Athens and about the same as Air France's 62 per cent at Charles de Gaulle in Paris.

In the fury that followed O'Leary's bid, however, commercial arguments gave way to emotional opposition. Aer Lingus pilots started to buy small parcels of shares at the inflated, bid-induced prices, paying up to €3.00 in a desperate attempt to block Ryanair control. Then, dramatically, Denis O'Brien, the mobile telecoms billionaire who had started business life as Tony Ryan's personal assistant more than twenty years earlier, announced that he had bought a stake because of his patriotic desire to keep Aer Lingus independent. There was in this an undercurrent of personal hostility. Only weeks before O'Leary had lampooned O'Brien's tax exile in Malta by using an image of him to advertise Ryanair's new route to the Mediterranean island.

The government's 25 per cent stake, added to the employees' 15, the pilots' 2 and O'Brien's 2.5 per cent, meant that O'Leary would have to secure almost all the outstanding equity in the company to get a simple majority of the shares, while outright control would remain outside his reach unless he could persuade the government and the employees to sell. The government's holding was large enough, under company and stock exchange rules, to block asset sales, and without securing more than 90 per cent of the shares O'Leary would be unable to force the remaining minority holders to sell. At best, with more than 50 per cent but less than 60 per cent, O'Leary would have control of the board and the management, but he would not have the freedom to break up the airline or sell its rights to landing slots at Heathrow airport – a valuable commodity much coveted by airlines who could not get access to London's major airport. O'Leary decided to increase his stake to 25 per cent and then wait for a ruling on the bid from
the European Commission, knowing that even if the Ryanair bid were approved, there was no way he could persuade the major shareholders to sell.

Although the takeover of Aer Lingus was now only a distant possibility, Ryanair's presence on the share register had an immediate impact on Aer Lingus management. Even though it had assured the unions that cost-cutting had come to an end, O'Leary had forced Aer Lingus to recognize that far from finishing, it had barely started. As soon as management tried to negotiate fresh savings and more flexible working conditions, strike action was threatened.

O'Leary does not plan to decrease the pressure on Aer Lingus. He says that his role as a shareholder will be similar to that played by J. P. McManus and John Magnier at Manchester United when the two Irish billionaires bought a stake in the club and bombarded its board with demands for action and information before eventually being bought out at great profit by Malcolm Glazer.

O'Leary's bid for Aer Lingus was a classic example of the extreme opportunism that characterizes the man. The raid on the airline's shares was a plan cobbled together in a matter of weeks, and only formalized in the days before the shares went on sale. While he had harboured ambitions of controlling Aer Lingus for years, he was not prepared to devote any energy to the project until such time as it was a real possibility. ‘I'd love to say that everything Ryanair ever does was extremely well thought out,' says one former executive. ‘But the honest answer is it's not. It's seat of the pants; you make it up as you go along.'

For O'Leary, nothing is set in stone, even if he says it is. ‘Having a long-term plan is a waste of time,' he says. ‘I'm not a thinker. You see opportunities and you try to take them. There's no point in having some long-term plan because a long-term plan gets knocked on its ass.'

O'Leary has always taken a hard line against all trade unions, but no area of labour relations has been more vexing to Ryanair than its long-running dispute with its pilots. Although Ryanair cannot legally forbid its employees from joining unions, it can refuse to
negotiate with them, and that had been its position vis-à-vis the Irish Airline Pilots Association (IALPA), which is part of the larger union IMPACT. In 2004, when Ryanair was upgrading its Dublin fleet from Boeing 737–200s to 737–800s, O'Leary decided to use the cost of retraining pilots as a bargaining chip. The pilots could either foot the €15,000 bill for the training themselves or could sign an agreement whereby the company paid for it on condition that it was not forced to deal with IALPA for the next five years. The union was outraged and plotted a legal response.

‘On a scale of one to ten, O'Leary hates the pilots at least eleven,' says one former executive, ‘and he hates IALPA even more. The pilots are well-paid professionals, and their working hours are restricted by law to 900 hours a year. He can't screw anything more out of them.'

In August 2004 the two representatives of the Dublin-based pilots on the Ryanair pilots' Employee Representative Council withdrew from it. IALPA, through Impact, claimed that the pilots and Ryanair were engaged in a trade dispute and asked the Labour Court to order the company to negotiate with the union now that, the pilots having withdrawn from the ERC, there was no internal company mechanism to resolve the dispute.

The retraining dispute spawned a number of separate legal battles between Ryanair and its pilots. Apart from the Labour Court case on union representation, which found in favour of the union, Ryanair was brought to court by John Goss, one of its Dublin-based pilots, and the company in turn went to court in an attempt to force a union-created website to reveal the names of pilots who had made anonymous postings on the site. Ryanair lost its attempt to unveil the pilots' identities and eventually reached an out-of-court settlement with Goss after a bruising battle that saw O'Leary threatened with jail for contempt of court and Ryanair claiming that Goss had intimidated other pilots who were prepared to accept O'Leary's retraining offer.

The major issue was not Goss or anonymous website postings but union recognition. The Labour Court had agreed with IMPACT that Ryanair should negotiate with the union but
O'Leary had immediately sought to overturn this decision. Eventually, in February 2007, the Supreme Court ruled that the Labour Court's reasoning had been flawed because it had failed to accept that Ryanair's ERCs and its willingness to negotiate with the Dublin pilots meant that internal mechanisms to resolve the dispute had not been exhausted. It was a significant victory for O'Leary in his never-ending battle to keep trade unions at bay.